Peoples Trust Company of Bergen County, Trustee Under the Will of Paul O'brien, Deceased and Executor Under the Will of Elsie Downer O'brien, Deceased, Appellant, v. United States of America, 412 F.2d 1156 (3d Cir. 1969)

Peoples Trust Company of Bergen County, as executor under the Will of Elsie Downer O'Brien, initiated this refund suit to recover estate taxes paid to the United States. The sole issue presented is whether decedent's power to invade the principal of a trust, the decedent also being the income beneficiary, was a power of appointment limited by an ascertainable standard relating to the health, education, support or maintenance of decedent within the meaning of § 2041(b) (1) (A) of the Internal Revenue Code of 1954.¹ 

In his will,²  the relevant provisions of which are set out in the margin,³  decedent's husband established a trust of the residue of his estate. The trustee was directed to pay the net income to the decedent as well as "such amounts out of the principal as my said wife from time to time may require; she to be the sole judge as to the amounts and frequency of such principal payments." During her life,⁴  the decedent received the income from the trust but she neither requested nor received any portion of the principal.⁵ 

The estate tax return filed by Elsie O'Brien's executor reported the existence of the trust but did not include in the taxable estate the value of the principal. The Internal Revenue Service disputed the claimed exclusion and assessed estate taxes in the amount of $21,978.92 plus interest.⁶  The assessment was paid by the appellant, the executor-bank, and following denial of its refund claim by the taxing authorities the bank brought this action in the district court.

The bank contended in the court below that decedent's power to consume the trust principal was limited by an ascertainable standard so that under § 2041 (b) (1) (A) the value of the principal was not includable in decedent's gross estate. On the basis of factual stipulations and briefs submitted by the parties the district court entered judgment for the United States⁷  and the taxpayer has appealed.

We start with the proposition that while the taxability of the interest possessed by decedent is to be determined by federal law, we must look to the local law — here New Jersey's — to determine the legal rights and interests possessed by decedent under the trust: Morgan v. Commissioner, 309 U.S. 78, 80-81, 626, 60 S. Ct. 424, 84 L. Ed. 585 (1940); Miller v. United States, 387 F.2d 866, 868 (3d Cir. 1968); Strite v. McGinnes, 330 F.2d 234, 238 (3d Cir.), cert. denied, 379 U.S. 836, 85 S. Ct. 69, 13 L. Ed. 2d 43 (1964); Citizens First Nat'l Bank of Ridgewood v. United States, 288 F. Supp. 750, 753 (D. N.J.1968); 2 Mertens, Law of Federal Gift & Estate Taxation § 19.08, pp. 515-517 (1959).

Determining the nature of decedent's interest under New Jersey law requires us to construe the will of her husband, Paul O'Brien, and in so doing our function is "to ascertain and give effect to the `probable intention of the testator,'" Fidelity Union Trust Co. v. Robert, 36 N.J. 561, 564, 178 A.2d 185, 187 (1962), having in mind that when construing wills "the controlling consideration is the effect of the words as actually written * * *." In re Armour's Estate, 11 N.J. 257, 271, 94 A.2d 286, 292 (1953).

In ascertaining the meaning of Item C. of Paragraph Seventh of the will, appellant would have us focus on the words "may require" as providing the standard or measure of decedent's right to request and utilize principal. To read "she to be the sole judge as to the amounts and frequency of such principal payments" as supplying the standard governing decedent's right to consume principal would, according to the appellant, result in ignoring the words "such" and "require."

In the taxpayer's view, proper construction of Item C. indicates that decedent's right to consume was limited to such amounts out of principal as she may require. By reference to New Jersey law, appellant then argues that "require" means "needs" and that the power to consume is limited by a duty imposed under New Jersey case law to consume only such principal as is reasonably necessary for comfortable maintenance and support. In other words, while decedent was to be the sole judge of the amounts and frequency of payments from principal, her requests were limited by what she believed she required, in good faith, for reasonable necessities or maintenance. And appellant argues further that the decedent would have been accountable as a fiduciary to the remaindermen for any invasion of principal beyond her good faith needs.

For a number of reasons we are unable to accept the arguments which appellant advances. First, the New Jersey cases to which we have been referred do not, as appellant asserts, consistently construe "require" to mean needs, or necessities, or maintenance. In fact, in one of the early New Jersey cases we have found which deals with the question the court implicitly assumed that "require" meant "demand."

In Lippincott v. Stokes, 6 N.J.Eq. 122 (Ch.1847), the issue presented was whether certain securities belonged to the estate of one Hope Haines and were to be disposed of under her will or whether they belonged to a trust created by the decedent's mother. By her will the decedent's mother had created a trust of one-fourth of her personal property, with directions to pay the interest to Hope for her life and to pay her "so much of the principal as she shall, from time to time, by writing under her hand, attested by two credible witnesses, require of the said trustees. * * *" During her life Hope had acquired the principal of the trust from the trustees, and the issue presented was whether she had "required" payment of the principal in the manner prescribed in the will, that is, by her own attested writing. In finding that she had not met these testamentary commands, which if followed would have entitled her to the principal without meeting any other condition, the court impliedly assumed that "require" meant "demand."⁸  See also Lippincott v. Ridgeway, 11 N.J.Eq. 526 (Ch.1858) (different issue but same will); cf. Corlies v. Allen, 36 N.J.Eq. 100 (Ch.1882) (payment of trust income "as she may need or require" held to limit the beneficiary's rights to income to so much as the trustees in good faith decide is necessary for her comfortable support, the court distinguishing the will under consideration in the Lippincott cases by stating "that there the word [require] was used in the sense of `demand.'" 36 N.J.Eq. at 101.)

We have examined other New Jersey cases, particularly those upon which appellant relies,⁹  and we do not find them to support the conclusion that in every case "require" means "need." Rather "require" has been viewed in the context in which it was used and an effort made in each instance to interpret its meaning in light of the instrument as a whole.

Evidently pursuing that course, the district court, in reaching its conclusion, found that,

The wife and life beneficiary was the object of the testator's bounty. All of his personal belongings were bequeathed to his wife; all of his real estate was devised to his wife; and the residue of the estate was put in trust for her benefit. * * *¹⁰ 

Such a finding with respect to the testator's intent suggests that the power conferred be given a broad construction: Sibson v. First Nat'l Bank and Trust Co., 61 N.J.Super. 88, 160 A.2d 76, modified, 64 N.J.Super. 225, 165 A.2d 800 (1960).¹¹ 

Appellant objects to the foregoing finding of fact by the district court, contending that the record contains no evidence of the value of the probate estate of Paul O'Brien to support or rebut the court's finding.¹²  A lower court's findings of fact are not to be disturbed on appeal unless clearly erroneous. We are satisfied that on this point the district court did not err. A reading of decedent's husband's will amply supports this finding. With the exception of his medical books and equipment, the testator gave his wife all of his personal property, all of the real estate which he might own at his death, all of the income from the trust created from his residuary estate, plus the power to invade trust principal. In addition, it is not without significance that in providing for the disposition of trust principal to his children upon his wife's death, Paul O'Brien directed the payment of "all that may remain of the principal of this trust * *." The use of these words suggests that the testator envisaged the possibility that his wife might utilize some or all of the principal of the trust, New Jersey Title Guar. & Trust Co. v. Dailey, 123 N.J.Eq. 205, 196 A. 703 (Ch.1938), and is further support for the proposition that the wife's power to consume was not a narrow one within the limits of the statutory ascertainable exception.

Moreover, even were we to accept appellant's argument that decedent's utilization of principal was limited because she was accountable as a fiduciary to the remaindermen for any invasion not made in good faith, the statutory standard would still not be met for, as Judge McLaughlin said in Strite v. McGinnes, supra, in response to a similar argument,

* * * [I]t is a fair construction of this section that the measure of control over the property by virtue of the grant of power is the determinant of the taxability of property subject to the power. See Morgan v. Commissioner, 309 U.S. 78, 60 S. Ct. 424, 84 L. Ed. 585 * * *.

* * * * * *

* * * The search of § 2041 is the breadth of power given a decedent. When that is determined, the tax consequence follows. Good faith exercise of a power is not determinative of its breadth. (Emphasis added.) 330 F.2d at 238, 240.¹³ 

In light of the language chosen by the testator, Paul O'Brien, and his clear purpose and decision to provide amply for his wife, we find that the decedent's power to consume corpus was not limited by an ascertainable standard relating to decedent's health, education, support or maintenance. And even if some limits were thought to be imposed by the "may require" standard, it seems fairly clear that the power possessed by the decedent would permit consumption of principal for her general benefit and so exclude the power from the § 2041(b) (1) (A) exception: Miller v. United States, supra; Strite v. McGinnes, supra; Internal Revenue Service Regulations, 26 C.F.R. § 20.2041-1(c) (2).

Appellant relies on two earlier decisions of this court, preceding Strite v. McGinnes, which dealt with the problems of the marital deduction and the taxability of the income from a trust, respectively. Commissioner v. Ellis, 252 F.2d 109 (3d Cir. 1958); Funk v. Commissioner, 185 F.2d 127 (3d Cir. 1950). Neither of these cases is controlling here.

In Ellis, a case arising in Pennsylvania, the taxpayer had the power under her husband's will to invade the corpus of a trust he had established for her if she should "require * * * she, and she alone, shall be the judge of how much shall be required * * *" The court held the trust ineligible for the marital deduction on the ground that the widow's power to invade the corpus of the trust was not completely unfettered.

Ellis is to be distinguished because,

(1) it related to the marital deduction rather than the § 2041 issue we have here;¹⁴ 

(2) it was decided under the law of Pennsylvania which may not necessarily be exactly the same as that of New Jersey on the construction of the language in the will;

(3) insofar as Ellis relied on the "good faith" duty imposed upon the life tenant, it is not in accord with Strite which applied the "measure of control" test; and

(4) the interpretation of the critical language in Ellis and in our case must, of course, be made in the context of the particular wills in which the words appeared. (See Security-Peoples Trust Co. v. United States, 238 F. Supp. 40, 51 (W.D. Pa. 1965), for a thorough analysis of the will in Ellis.)

Funk, a case arising in New Jersey, did not involve the ascertainable standard problem under § 2041, but rather the taxability of certain income under a trust which gave the wife-beneficiary power to distribute income to herself and her husband "in accordance with our respective needs, of which she shall be the sole judge." The court held the wife's power not to be completely unfettered and, therefore, the income not taxable.

We do not believe Funk to be significant because there the trust instrument actually used the term "needs." Here, Paul OBrien's will used the word "require" which, as we have shown above, does not conclusively and uniformly mean "needs" under the New Jersey case Law. Also, the fact that a decedent's power of appointment may not be completely unlimited, as in Funk, does not mean that it comes within the strict elements of the ascertainable standard test under § 2041. Finally, as in Ellis, the court's reliance in Funk on the "good faith" test is not wholly consistent with the subsequent Strite v. McGinnes decision.

Appellant also asks that we follow the rationale of Pittsfield National Bank v. United States, 181 F. Supp. 851 (D. Mass. 1960), a § 2041 ascertainable standard case arising under Massachusetts law. The relevant language in the trust in that case gave to the decedent the income during his life "together with all or such part of the principal of same as he may from time to time request, he to be the sole judge of his needs." The district court concluded that the limitation came within the ascertainable standard test under § 2041.

Pittsfield is not directly in point here because it involves the law of another jurisdiction and because, as in Funk, the trust language actually referred to "needs" whereas the trust in the instant case, of course, uses the term "require." Furthermore, the Massachusetts district court in analyzing the testator's intent from the "four corners" of the instrument said, in a portion of its opinion quoted in appellant's brief (pp. 34, 35):

* * * The grant of the power must be read in its entirety, and so read I rule that it was a grant of a power to invade corpus only in the event the donee was in financial or physical need. This conclusion becomes even more compelling upon an examination of the circumstances surrounding the creation of the trust and the provisions concerning the disposition of the remainder.

* * * It is quite apparent that Mrs. Colt intended principally to provide for the remaindermen and to give her husband a power of invasion only in the unlikely event that he should need any part of the principal without subjecting the property again to taxation. 181 F. Supp. at 854.

As previously indicated, Judge Wortendyke, in the court below, found the intent in the trust created by Paul O'Brien's will to be to the contrary, a finding we consider to be fully supportable.

In summary, appellant's two main arguments in support of its position are:

(1) that "require" means "needs" and, therefore, comes within the ascertainable standard test of § 2041; and

(2) that, in any event, the good faith fiduciary duty imposed by New Jersey law upon the decedent as life tenant is sufficient to restrict her power within the ascertainable standard formula.

The first argument, as we have shown, founders on the uncertainty of New Jersey case law; the second is in direct conflict with our prior holding in Strite v. McGinnes.¹⁵ 

The judgment entered by the district court will be affirmed.¹⁶